Will the Japanese Yen reverse its downward trend? Institutions are collectively bullish, and it may break through the 140 level by 2026.

The USD/JPY exchange rate has recently been under continuous pressure. As of November 25, it stood at 156.60, having declined from earlier highs. Market opinions diverge on the logic behind this decline—whether it is a short-term adjustment or a signal of a new upward cycle.

Morgan Stanley: Yen Could Appreciate by Up to 10%

Morgan Stanley’s strategists have issued an aggressive forecast. They believe that as the Federal Reserve accelerates its rate cuts, the USD/JPY exchange rate will face significant pressure. If signals of US economic slowdown persist and prompt the Fed to continue liquidity releases over the coming months, the yen could appreciate against the dollar by nearly 10%.

A more specific timeline has been provided: Morgan Stanley expects USD/JPY to hit a low near 140 in Q1 2026, then rebound to around 147 by the end of the year. This suggests a tug-of-war between appreciation and depreciation will continue throughout 2026.

“Currently, the exchange rate is far from its fair value range,” said Matthew Hornbach, an analyst at Morgan Stanley. “Once US Treasury yields continue to decline, the USD/JPY will follow suit and weaken.” They also emphasize that Japan’s fiscal policy space is limited, and if the US economy recovers in the second half of next year, arbitrage trading will re-activate, putting renewed downward pressure on the yen.

170 Fund Managers Bet on Yen, 2026 Could Be the “Most Attractive” Currency

Morgan Stanley’s view is not isolated. A recent survey by Bank of America of about 170 fund managers showed that nearly one-third of respondents believe the yen will outperform other major currencies next year, making it the best investment choice.

The logic among fund managers is clear: the yen is currently undervalued, and with the Bank of Japan and government possibly intervening in the USD/JPY exchange rate, such policy support could help the yen rebound. In other words, both policy and valuation factors may work together to push the yen higher.

Divergence in Monetary Policies as a Key Driver

The mismatch in policy stances between the US and Japan is reshaping the exchange rate landscape. The combination of the Fed’s “dovish” rate cuts and the Bank of Japan’s cautious rate hikes has been a key driver of the dollar’s strength against the yen. Now, the situation has reversed— the Fed has been dovish, with market pricing in an 80% chance of rate cuts in December, while Japan’s new government is implementing fiscal support, but the central bank’s policy remains cautious.

This policy misalignment is becoming the engine behind the reverse movement of USD/JPY. In the short term, market sentiment and economic data will continue to dominate exchange rate fluctuations, but in the medium term, many institutions agree that USD/JPY could fall to around 140.